UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

¨

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission File Number 2-5916

 

Chase General Corporation

(Exact name of small business issuer as specified in its charter)

 

	MISSOURI		36-2667734
	(State or other jurisdiction of		(IRS Employer Identification No.)
	incorporation or organization)

 

1307 South 59th, St. Joseph, Missouri 64507

(Address of principal executive offices, Zip Code)

 

(816) 279-1625

(Issuer’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No ¨

 

Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

	Large accelerated filer ¨		Accelerated filer ¨
	Nonaccelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company x
	Emerging Growth Company ¨

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ¨    No x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes ¨    No x

 

As of November 12, 2017, there were 969,834 shares of common stock, $1.00 par value, outstanding.

 

 

 

Chase General Corporation and Subsidiary

quarterly report on form 10-q

table of contents

for the three months ended September 30, 2017

 

Part 1	Financial Information
	Item 1.	Condensed Consolidated Financial Statements
	Condensed consolidated Balance Sheet as of September 30, 2017 (Unaudited) and June 30, 2017		1
	Condensed consolidated statements of operations for the three months ended September 30, 2017 and 2016 (Unaudited)		3
	Condensed consolidated statements of cash flows for the three months ended September 30, 2017 and 2016 (Unaudited)		4
	Note to Condensed consolidated financial statements (Unaudited)		5
	Item 2.	Management’s discussion and Analysis of Financial Condition and Results of Operations	11
	Item 3.	Quantitative and qualitative disclosures about market risk	16
	Item 4.	Controls and Procedures	16
Part II	Other Information
	Item 1.	Legal Procedures	17
	Item 1A.	Risk Factors	17
	Item 2.	Unregistered Sales of Equity Securities and Use of PrOceeds	17
	Item 3.	Defaults upon senior securities	17
	Item 4.	Mine safety disclosures	17
	Item 5.	Other information	17
	Item 6.	exhibits	17
	Signatures		18

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30,				June 30,
		2017				2017
		(Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents		$	4,569			$	46,182
Trade Receivables, Net of Allowance for Doubtful Accounts of $14,033 and $13,733, Respectively			658,786				127,207
Inventories:
Finished Goods			228,021				270,352
Goods in Process			11,336				13,393
Raw Materials			83,312				60,655
Packaging Materials			168,178				135,638
Prepaid Expenses			42,841				24,689
Income Tax Receivable			63,691				11,160
Total Current Assets			1,260,734				689,276
LONG-TERM ASSETS
Property and Equipment:
Land			35,000				35,000
Buildings			77,348				77,348
Machinery and Equipment			838,131				838,131
Trucks and Autos			213,116				213,116
Office Equipment			31,518				31,518
Leasehold Improvements			72,068				72,068
Total			1,267,181				1,267,181
Less Accumulated Depreciation			1,019,139				1,002,043
Total Property and Equipment, Net			248,042				265,138
Deferred Income Taxes			-				27,163
Total Long-Term Assets			248,042				292,301
Total Assets		$	1,508,776			$	981,577

 

The accompanying notes are an integral part of the unaudited

condensed consolidated financial statements.

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

 

		September 30,				June 30,
		2017				2017
		(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable		$	266,042			$	63,628
Current Maturities of Notes Payable			346,306				16,133
Accrued Expenses			54,587				29,239
Deferred Income			1,299				1,299
Total Current Liabilities			668,234				110,299
LONG-TERM LIABILITIES
Deferred Income Taxes			30,577				-
Notes Payable, Less Current Maturities			35,122				39,264
Deferred Income			8,441				8,765
Total Long-Term Liabilities			74,140				48,029
Total Liabilities			742,374				158,328
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Capital Stock Issued and Outstanding:
Prior Cumulative Preferred Stock, $5 Par Value: Series A (Liquidation Preference $2,287,500 and $2,280,000, Respectively)			500,000				500,000
Series B (Liquidation Preference $2,242,500 and $2,235,000, Respectively)			500,000				500,000
Cumulative Preferred Stock, $20 Par Value: Series A (Liquidation Preference $5,150,897 and $5,136,263, Respectively)			1,170,660				1,170,660
Series B (Liquidation Preference $839,440 and $837,055, Respectively)			190,780				190,780
Common Stock, $1 Par Value			969,834				969,834
Paid-In Capital in Excess of Par			3,134,722				3,134,722
Accumulated Deficit			(5,699,594	)			(5,642,747	)
Total Stockholders' Equity			766,402				823,249
Total Liabilities and Stockholders' Equity		$	1,508,776			$	981,577

 

The accompanying notes are an integral part of the unaudited

condensed consolidated financial statements.

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended
		September 30
		2017				2016
NET SALES		$	870,430			$	862,188
COST OF SALES			661,092				671,891
Gross Profit on Sales			209,338				190,297
OPERATING EXPENSES
Selling			112,332				99,266
General and Administrative			147,036				135,746
Total Operating Expenses			259,368				235,012
Loss from Operations			(50,030	)			(44,715	)
OTHER INCOME (EXPENSE)
Miscellaneous Income			370				375
Interest Expense			(1,978	)			(815	)
Total Other Income (Expense)			(1,608	)			(440	)
Net Loss before Income Taxes			(51,638	)			(45,155	)
INCOME TAX EXPENSE (BENEFIT)			5,209				(17,228	)
NET LOSS		$	(56,847	)		$	(27,927	)
NET LOSS PER SHARE OF COMMON STOCK
Basic		$	(0.09	)		$	(0.06	)
Diluted		$	(0.09	)		$	(0.06	)

 

The accompanying notes are an integral part of the unaudited

condensed consolidated financial statements.

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Three Months Ended
		September 30
		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss		$	(56,847	)		$	(27,927	)
Adjustments to Reconcile Net Loss to Net Cash Used by Operating Activities:
Depreciation and Amortization			17,096				26,493
Allowance for Bad Debts			300				300
Deferred Income Amortization			(324	)			(325	)
Deferred Income Taxes			57,740				(17,193	)
Effects of Changes in Operating Assets and Liabilities:
Trade Receivables			(531,879	)			(460,832	)
Inventories			(10,809	)			(46,988	)
Prepaid Expenses			(18,152	)			(24,326	)
Income Taxes Receivable			(52,531	)			(32	)
Accounts Payable			202,414				241,036
Accrued Expenses			25,348				25,349
Net Cash Used by Operating Activities			(367,644	)			(284,445	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment			-				(17,247	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Line-of-Credit			330,000				275,000
Principal Payments on Notes Payable			(3,969	)			(3,803	)
Bank Overdraft			-				17,153
Net Cash Provided by Financing Activities			326,031				288,350
NET DECREASE IN CASH AND CASH EQUIVALENTS			(41,613	)			(13,342	)
Cash and Cash Equivalents - Beginning of Period			46,182				19,259
CASH AND CASH EQUIVALENTS - END OF PERIOD		$	4,569			$	5,917

 

The accompanying notes are an integral part of the unaudited

condensed consolidated financial statements.

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1

GENERAL

 

The condensed consolidated balance sheet of Chase General Corporation (hereinafter referred to as “Chase”, “we”, “our”, and “us”) at June 30, 2017 has been condensed from audited consolidated financial statements at that date. The condensed consolidated financial statements as of and for the three months ended September 30, 2017 and for the three months ended September 30, 2016 are unaudited and reflect all normal and recurring accruals and adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, operating results and cash flows for the interim periods presented in this quarterly report. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in our Annual Report on Form 10-K for the year ended June 30, 2017. The results of operations for the three months ended September 30, 2017 and cash flows for the three months ended September 30, 2017 are not necessarily indicative of the results for the entire fiscal year ending June 30, 2018. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present financial position, results of operations and cash flows for the periods have been included.

 

No events have occurred subsequent to September 30, 2017, through the date of filing this form, that would require disclosure in this Form 10-Q or would be required to be recognized in the condensed consolidated financial statements as of or for the three month period ended September 30, 2017.

 

NOTE 2

EARNINGS (LOSS) PER SHARE

 

The earnings (loss) per share were computed on the weighted average of outstanding common shares during the period.

 

		Three Months Ended
		September 30
		2017				2016
Net Loss		$	(56,847	)		$	(27,927	)
Preferred Dividend Requirements:
6% Prior Cumulative Preferred, $5 Par Value			15,000				15,000
5% Convertible Cumulative Preferred, $20 Par Value			17,018				17,018
Total Dividend Requirements			32,018				32,018
Net Loss - Common Stockholders		$	(88,865	)		$	(59,945	)

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2

EARNINGS (LOSS) PER SHARE (CONTINUED)

 

Diluted earnings per share are calculated by including contingently issuable shares with the weighted average shares outstanding.

 

		Three Months Ended
		September 30
		2017				2016
Weighted Average Shares - Basic			969,834				969,834
Dilutive Effect of Contingently Issuable Shares			1,033,334				1,033,334
Weighted Average Shares – Diluted			2,003,168				2,003,168
Basic Loss per Share		$	(0.09	)		$	(0.06	)
Diluted Loss per Share		$	(0.09	)		$	(0.06	)

 

The contingently issuable shares were not included in diluted earnings per common share as they would have an antidilutive effect upon earnings per share. Cumulative Preferred Stock dividends in arrears at September 30, 2017 and 2016 totaled $8,108,896 and $7,980,824, respectively. Total dividends in arrears, on a per share basis, consist of the following:

 

		Three Months Ended
		September 30
		2017				2016
6% Convertible
Series A		$	18			$	17
Series B		$	17			$	17
5% Convertible
Series A		$	68			$	67
Series B		$	68			$	67

 

The 6% convertible prior cumulative preferred stock may, upon thirty days prior notice, be redeemed by the Corporation at $5.25 a share plus unpaid accrued dividends to date of redemption. In the event of voluntary liquidation, holders of this stock are entitled to receive $5.25 per share plus accrued dividends. It may be exchanged for common stock at the option of the shareholders in the ratio of 4 common shares for one share of Series A and 3.75 common shares for one share of Series B.

 

The Company has the privilege of redemption of 5% convertible cumulative preferred stock at $21.00 a share plus unpaid accrued dividends. In the event of voluntary or involuntary liquidation, holders of this stock are entitled to receive $20.00 a share plus unpaid accrued dividends. It may be exchanged for common stock at the option of the shareholders, in the ratio of 3.795 common shares for one of preferred.

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 3

NOTES PAYABLE

 

The Company’s long-term debt consists of:

 

				September 30,				June 30,
Payee		Terms		2017				2017
Nodaway Valley Bank		$350,000 line-of-credit agreement expiring on January 4, 2018, with a variable interest rate at prime but not less than 5%.  The line-of-credit is collateralized by substantially all assets of the Company. Management anticipates renewal of the line-of-credit agreement at similar terms upon expiration.		$	330,000			$	-
Ford Credit		$705 monthly payments, interest of 5.8%; final payment due October 2021, secured by a vehicle.			30,658				32,308
Toyota Credit		$364 monthly payments, interest of 3.5%; final payment due December 2020, secured by a vehicle.			13,413				14,383
Ford Credit		$470 monthly payments, interest of 2.9%; final payment due January 2019, secured by a vehicle.			7,358				8,706
Total					381,428				55,397
Less Current Portion					346,306				16,133
Long-Term Portion				$	35,122			$	39,264

 

Future minimum payments for the twelve months ending September 30 are:

 

Twelve Months Ending September 30,		Amount
2018		$	346,306
2019			13,229
2020			11,947
2021			9,245
2022			701
Total		$	381,428

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 4

INCOME TAXES

 

The Company follows the provisions for uncertain tax positions as addressed in Financial Accounting Standards Board Accounting Standards Codification 740-10. The Company recognized no liability for unrecognized tax benefits at September 30, 2017. The Company has no material tax positions at September 30, 2017 for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. The Company’s federal income tax returns for the fiscal years ended 2015, 2016 and 2017 are subject to examination by the Internal Revenue Service (IRS) taxing authority.

 

NOTE 5

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

		Three Months Ended
		September 30
		2017				2016
Cash Paid for:
Interest		$	1,978			$	812

 

NOTE 6

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In May 2014, the Financial Accounting Standards Board (FASB) issued amended guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required regarding customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The guidance will initially be applied retrospectively using one of two methods. The standard will be effective for the entity for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted beginning for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company plans to adopt the new standard on July 1, 2018 on a modified retrospective basis. The Company is finalizing reviews and working on implementing the process, policy and disclosure changes that will go into effect on July 1, 2018. At this time, the Company is evaluating the impact of the amended revenue recognition guidance on its consolidated financial statements.

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 6

recently issued accounting pronouncements (CONTINUED)

 

In February 2016, the FASB issued amended guidance for the treatment of leases. The guidance requires lessees to recognize a right-of-use asset and a corresponding lease liability for all operating and finance leases with lease terms greater than one year. The guidance also requires both qualitative and quantitative disclosures regarding the nature of the entity’s leasing activities. The guidance will initially be applied using a modified retrospective approach. The amendments in the guidance are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of the amended lease guidance on the its consolidated financial statements.

 

There have been no other newly issued or newly applicable accounting pronouncements that have, or are expected to have, a significant impact on the Company's consolidated financial statements.

 

Recently Adopted Pronouncements

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes. ASU 2015-17 requires that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet, instead of separating deferred taxes into current and noncurrent amounts. During the period ended September 30, 2017, the Company elected to retrospectively adopt ASU 2015-17, resulting in a reclassification reducing both deferred tax assets and deferred tax liabilities by $63,306 on the balance sheet at June 30, 2017. There was no impact on results of operations as a result of the adoption of ASU 2015-17.

 

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," (ASU 2015-11). The core principal of the guidance is that an entity should measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance was effective on July 1, 2017. The adoption of this amendment did not have a material impact on these financial statements.

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 7

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company’s financial instruments consist principally of cash and cash equivalents, trade receivables and payables, and notes payable. There are no significant differences between the carrying value and fair value of any of these consolidated financial instruments. As of September 30, 2017, the amount of the Company’s long-term debt approximates fair value based on the present value of estimated future cash flows using a discount rate commensurate with a borrowing rate available to the Company.

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

OVERVIEW

 

Chase General Corporation (Chase) is a holding company for its wholly-owned subsidiary, Dye Candy Company. This subsidiary is the main operating company that is engaged in the manufacture of confectionery products which are sold primarily to wholesale houses, grocery accounts, vendors, and repackers. The subsidiary (Company) operates two divisions, Chase Candy division and Seasonal Candy division, which share a common labor force and utilize the same basic equipment and raw materials. Therefore, segment reporting for the two divisions is not maintained by management.

 

The Company’s business, like that of many other confectionary product manufacturers, is seasonal. Historically, the Company has realized more of its revenue and earnings in the fiscal second quarter, which includes the majority of the holiday shopping season, than in any other fiscal quarter.

 

RESULTS OF OPERATIONS - Three Months Ended September 30, 2017 Compared with Three Months Ended September 30, 2016

 

The following management comments regarding Chase’s results of operations and outlook should be read in conjunction with the condensed consolidated financial statements included pursuant to Item 1 of the quarterly report.

 

The following table sets forth certain items as a percentage of net sales and revenues for the periods presented:

 

		Three Months Ended
		September 30
		2017				2016
Net Sales			100	%			100	%
Cost of Sales			76				78
Gross Profit on Sales			24				22
Operating Expenses			30				27
Loss from Operations			(6	)			(5	)
Other Income (Expense), Net			(0	)			(0	)
Loss before Income Taxes			(6	)			(5	)
Provision (Benefit) for Income Taxes			1				(2	)
Net Loss			(7	)%			(3	)%

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

NET SALES

 

Net sales increased $8,242 or 1% for the three months ended September 30, 2017 to $870,430 compared to $862,188 for the three months ended September 30, 2016. Gross sales for Seasonal Candy increased $91,076 to $538,138 for the three months ended September 30, 2017, compared to $447,062 for 2016. Gross sales for Chase Candy decreased $72,864 to $349,021 for the three months ended September 30, 2017, compared to $421,885 for 2016. Sales returns and allowances for the Company increased $10,464 to $17,262 for the three months ended September 30, 2017, compared to $6,798 for 2016. The Company’s other sales increased $494 to $533 for the three months ended September 30, 2017, compared to $39 for 2016.

 

The 20% increase in gross sales of Seasonal Candy of $91,076 for the three months ended September 30, 2017 over the same period ended September 30, 2016, is primarily due to the net effect of the following: 1) increased orders in the bulk seasonal division netting approximately $40,500 due to increased sales to existing customers; 2) increased volume from various customers in the clamshell seasonal division netting approximately $34,500 versus the same period a year ago primarily due to existing customers increasing orders; 3) increased orders from customers in the generic seasonal division netting approximately $16,000 versus the same period a year ago primarily due to existing customer increasing orders; and 4) an approximate 5% average increase to the price of Seasonal Candy products.

 

The 17% decrease in gross sales of Chase Candy of $72,864 for the three months ended September 30, 2017 over the same period ended September 30, 2016, is primarily due to the net effect of the following: 1) decreased sales of the L276 Cherry Mash Distributor Pack division by approximately $68,000 versus the same period a year ago primarily due to decreased orders from existing customers; 2) decreased sales of L278/L212 Mini Mash division by approximately $6,000 versus the same period a year ago primarily due to decreased orders from existing customers; and 3) decreased sales of L100, L200, SK436, and SK2100 Cherry Mash Merchandisers division by approximately $6,000 versus the same period a year ago due to decreased orders from existing customers; offset by 4) increased sales in the L279 and L299 Bulk Mini Mash division by approximately $8,000 versus the same period a year ago due to increased orders from existing customers.

 

COST OF SALES

 

The cost of sales decreased $10,799 to $661,092, or 76% of related sales for the three months ended September 30, 2017 compared to $671,891, or 79% of related sales for the three months ended September 30, 2016.

 

The 2% decrease in cost of sales of $10,799 is primarily due a decrease in direct labor of approximately $41,000 due to less temporary labor being hired and shorter hours for the temporary labor that was hired and a 2% decrease in the quantity of Chase Candy and Seasonal Candy divisions. This was offset by an 8% increase in the raw material cost of corn syrup, a 4% increase in the raw material cost of peanuts, and a 1% decrease in the raw material cost of chocolate. Due to volatility in the regions where these raw materials are grown, management anticipates the prices of these raw materials to continue to fluctuate primarily based on supply and demand.

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

SELLING EXPENSES

 

Selling expenses for the three months ended September 30, 2017 increased $13,066 to $112,332, which is 13% of sales, compared to $99,266 or 12% of sales for the three months ended September 30, 2016.

 

The increase of $13,066 in selling expenses for the three months ended September 30, 2017 is primarily due to higher promotions expense and commissions expense offset by lower truck expense. Promotions expense increased $11,943 to $29,018 for this period from $17,075 for the three months ended September 30, 2016 primarily due to an increase in net sales that have a bill-back allowance. Commission expense increased $2,490 to $35,805 for this period from $33,315 for the three months ended September 30, 2016 primarily due to the increase in net sales. Truck expense decreased $1,195 to $1,675 for this period from $2,870 for the three months ended September 30, 2016 primarily due to less shipments of goods to the local warehouse.

 

GENERAL AND ADMINISTRATIVE EXPENSES

 

General and administrative expenses for the three months ended September 30, 2017 increased $11,290 to $147,036 and increased to 17% of sales, compared to $135,746 or 16% of sales for the three months ended September 30, 2016. The increased costs are primarily because of an increase in website expense and insurance expense offset by a decrease in miscellaneous general expense. Website expense increased $12,263 to $14,336 for this period from $2,073 for the three months ended September 30, 2017 primarily due to redesigning the website for the 100^th anniversary of the Cherry Mash. Insurance expense increased $4,037 to $31,484 for this period from $27,447 for the three months ended September 30, 2017 primarily due to an increase in the health insurance premiums partially paid by the Company. Miscellaneous general expense decreased $5,797 to $2,266 for this period from $8,063 for the three months ended September 30, 2017 primarily due to a non-recurring $6,000 expense occurring in the three months ended September 30, 2016.

 

OTHER INCOME (EXPENSE)

 

Other income (expense) decreased by $1,168 for the three months ended September 30, 2017 to $(1,608) compared to $(440) for the three months ended September 30, 2016 primarily due to an increase in interest expense of $1,163.

 

INCOME TAX EXPENSE (BENEFIT)

 

The Company recorded a tax expense for the three months ended September 30, 2017 of $5,209 as compared to tax benefit of $(17,228) for the three months ended September 30, 2016. The income tax expense recorded for the three months ended September 30, 2017 is primarily due to an approximately $25,000 change in estimate relating to the net operating loss deferred tax asset recorded at June 30, 2017 and the amount of income tax refund actually expected to be received.

 

NET LOSS

 

The Company reported a net loss for the three months ended September 30, 2017 of $56,847, compared to net loss of $27,927 for the three months ended September 30, 2016. This decrease of $28,920 is explained above.

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

PREFERRED DIVIDENDS

 

Preferred dividends were $32,018 for the three months ended September 30, 2017 and 2016, which reflects additional preferred stock dividends in arrears on the Company’s Series A and Series B $5 par value preferred stock and its Series A and Series B $20 par value preferred stock.

 

NET LOSS APPLICABLE TO COMMON STOCKHOLDERS

 

Net loss applicable to common stockholders for the three months ended September 30, 2017 was $88,865 which is a decrease of $28,920 as compared to the net loss for the three months ended September 30, 2016 of $59,945.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The table below presents the summary of cash flow for the fiscal year indicated.

 

		Three Months Ended
		September 30
		2017				2016
Net Cash Used in Operating Activities		$	(367,644	)		$	(284,445	)
Net Cash Provided by (Used in) Investing Activities			-				(17,247	)
Net Cash Provided by Financing Activities			326,031				288,350

 

Management has made no material commitments for capital expenditures during the remainder of fiscal 2018. The $367,644 of cash used in operating activities is fully detailed in the condensed consolidated statement of cash flows on page four. The $326,031 of cash provided by financing activities is primarily due to the receipt of $330,000 drawn from a line-of-credit, net of principal payments on equipment and vehicle loans. The proceeds from the line-of-credit during the period ended September 30, 2017 were used to finance the buildup of inventories which is reflected in the cash used in operating activities. At September 30, 2017, the Company had $20,000 remaining on the line-of-credit, which could be utilized to help fund any working capital requirements. Management expects that projected cash flows will enable the Company to pay the full balance on the line-of-credit prior to December 31, 2017.

 

Management believes that the projected cash flow from operations, combined with its existing cash balances, will be sufficient to meet its funding requirements for the foreseeable future.

 

Management believes that inflation will have only a minimal effect on future operations since such effects will generally be offset by sales price increases, which are not expected to have a significant effect upon demand.

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

CRITICAL ACCOUNTING POLICIES

 

Forward-Looking Information

 

This report, as well as our other reports filed with the Securities and Exchange Commission (SEC), contains forward-looking statements made pursuant to the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. The words “believe,” “estimate,” “anticipate,” “project,” “intend,” “expect,” “plan,” “outlook,” “forecast,” “may,” “will,” “should,” “continue,” “predict” and similar expressions are intended to identify forward-looking statements. This report contains forward-looking statements regarding, among other topics, our expected financial position, results of operations, cash flows, strategy, and management’s plans and objectives. Accordingly, these forward-looking statements are based on assumptions about a number of important factors. While we believe that our assumptions about such factors are reasonable, such factors involve risks and uncertainties that could cause actual results to be different from what appear here. These risk factors include: the ability to adequately pass through customers unanticipated future increases in raw material costs, decreased demand for products, expected orders that do not occur, loss of key customers, the impact of competition and price erosion as well as supply and manufacturing constraints, and other risks and uncertainties. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this report will prove accurate, and our actual results may differ materially from these forward-looking statements. We assume no obligation to update any forward-looking statements made herein.

 

 

Chase General Corporation and Subsidiary

PART I. FINANCIAL INFORMATION

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable to a smaller reporting company.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures

 

Chase’s management, with the participation of the Chief Executive Officer, has evaluated the effectiveness of Chase’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and management has concluded that Chase’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in periodic filings under the Exchange Act is accumulated and communicated to management, including those officers, and to members of the Board of Directors, to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Control over Financial Reporting

 

In connection with the preparation of our financial statements for the period ending September 30, 2017, we identified a material weakness in our internal control over financial reporting related to our controls over the use of the retail inventory method in estimating ending inventory balances. This control deficiency resulted in a material adjustment to our ending inventory balance which is reflected in our financial statements for the period.

 

Except as described above, there were no significant changes in Chase’s internal control over financial reporting or in other factors that in management’s estimates are reasonably likely to materially affect Chase’s internal control over financial reporting subsequent to the date of the evaluation.

 

 

Chase General Corporation and Subsidiary

 

Part II. OTHER INFORMATION

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

None.

 

ITEM 1A.

RISK FACTORS

 

Not applicable to a smaller reporting company.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

a.

None

 

b.

The total cumulative preferred stock dividends contingency at September 30, 2017 is $8,108,896.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.

OTHER INFORMATION

 

None

 

ITEM 6.

EXHIBITS

 

	Exhibit 31.1	Certification of Chief Executive Officer and Financial Officer Pursuant to Rules 13A-14(A) and 15D-14(A) Under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	Exhibit 32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	Exhibit 101	The following financial statements for the quarter ended September 30, 2017, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	Chase General Corporation and Subsidiary
	(Registrant)
November 13, 2017	/s/ Barry M. Yantis
Date	Barry M. Yantis
	Chairman of the Board, Chief Executive Officer and
	Chief Financial Officer, President, and Treasurer